Economic Analysis of the Impact of Development Aid : An Application of Error Correction Modelling (ECM) to Ethiopia

gebregergis, Cherkos Meaza (2016): Economic Analysis of the Impact of Development Aid : An Application of Error Correction Modelling (ECM) to Ethiopia. Published in:

Abstract

Foreign aid inflows have grown significantly in the post-war period. Many studies have tried to assess the effectiveness of aid at the micro- and macro-level. While micro evaluations have found that in most cases aid ‘works’, those at the macro-level are ambiguous. This paper investigates the impact of foreign aid on economic growth in Ethiopia using time series data for the period 1981 to 2015. The main objective is to identify the relationship that aid has with the developmental path of the country and whether one can reasonably link outcomes to aid inputs.

To this end, the study used the production function initiated by Solow-Swan model and cointegration analysis. The study is able to demonstrate the existence of long-run relationship between the official development assistance and economic growth of Ethiopia. The study found that there is negative relationship between ODA and economic growth in the short run and tend to be positive in the long run.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic Growth, Official Development Assistance, cointegration analysis
• Subjects: F - International Economics > F2 - International Factor Movements and International Business; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O19 - International Linkages to Development ; Role of International Organizations

References

Alemu G. (2009), “A Case Study On Aid Effectiveness In Ethiopia; Analysis Of The Health Sector Aid Architecture”, Wolfensohn Center For Development Working Paper 9

Arndt C., Jones S. and Tarp F. (2006), “Aid and Development: The Mozambican Case”, Studiestræde 6, DK-1455 Copenhagen K., Denmark

Bhattarai B. (2005), “The Effectiveness of Foreign Aid: A Case Study of Nepal”, University of Western Sydney, Sydney, Australia.

Birara Y. (2011), “The Impact Of Foreign Aid On Economic Growth In Ethiopia”, Master thesis, AAU.

Bitew T. (2014), “Foreign Aid and Economic Growth in Ethiopia”, Unpublished Thesis, AAU

Boone, P. (1994), “The Impact of Foreign Aid on Savings and Growth”, London School of Economics

Burnside, C. and Dollar, D. (1997), “Aid, Policies and Growth”, Policy Research Working Paper 1777, World Bank, Washington, D.C

Burnside, C. and Dollar, D. (2000), “Aid, Policies and Growth”, American Economic

Durbarry R., Gemmell N. and Greenaway D (1998), “New Evidence on the Impact of Foreign Aid on Economic Growth”, Centre for Research in Economic Development and International Trade, University of Nottingham

Easterly W. (2003), “Can Foreign Aid Buy Growth?”, Journal of Economic Perspectives Volume 17, Number 3

Geda, A. and Tafere, K. (2011), “Official Development Assistance (Aid) and its Effectiveness in Ethiopia”, IAES working paper A07/2011

Gomanee K., Girma S. and Morrissey O. (2005), “Aid and Growth in Sub Saharan Africa: Accounting for Transmission Mechanisms”, Research paper No. 2005/60, United Nation University.

Haque, N. and Khan, M. (1998), “Do IMF-Supported Programs Work: A Survey of Cross- Country Empirical Evidence”, IMF Working Paper/98/169/

Holden K. and Thompson J. (1992), “Co-Integration; An Introductory Survey”, British Review of Economic Issues, volume 14, No 33 http://www.nber.org/papers/w11513

IMF (2015), IMF, Ethiopia’s Country Report No. 15/326

Kim J. (2006), “The Impact of Foreign Aid on Economic Growth in Developing countries”, Sogang University

Liew Y., Mohamed R. and Mzee S. (2012), “ The Impact of Foreign Aid on Economic Growth of East African Countries”, Journal of Economics and Sustainable Development, Vol.3, No.12

Mosley P., Hudson J, and Sara H. (1987), “Aid, the Public Sector and the Market in Less Developed Countries”, The Economic Journal, Vol. 97, No. 387 Online at https://mpra.ub.uni-muenchen.de/33953/

Papanek G. (1973), “Aid, Foreign Private Investment, savings, and Growth in Less Developed Countries”, Journal of Political Economy 81(1): 120-130.

Rajan G. and Subramanian A. (2005), “Aid And Growth: What Does The Cross-Country Evidence Really Show?”, NBER Working Paper No 11513, Massachusetts Avenue, Cambridge Review, Vol. 90, pp. 847-68

Riddell, R. (2014), “Does Foreign Really Work?”, Oxford Policy Management, oxford, UK

Tadesse T. (2011), “Foreign aid and economic growth in Ethiopia” MPRA Paper No. 33953.

UNCTAD (2006), “Doubling Aid; Making The Big-Push Work”, Geneva, UNCTAD Secretariat

White H. and Luttik J. (1994), “The Countrywide Effect of Aid’’, WB policy Research Working Paper No 1337

Wondwossen T. (2003), “An empirical investigation of the Aid-growth relationship in Ethiopia.” Unpublished M.Sc. thesis, AAU